Own the manager: Seif’s safer plan for investors

Som Seif's safer plan for investors

Som Seif has packed a lot into his 36 years.

In his first career he was as an investment banker at RBC Capital Markets, while in his second, a more public role, he was founder of the Canadian operations of Claymore Investments, a company that grew over seven years to $8-billion in assets under management before being sold to BlackRock early last year.

Now, as the founder of Purpose Investments, he is back with career number three. Purpose, an investment management company focused “on managing low fee, intelligent investment products for Canadian institutional and retail investors and is committed to enabling all investors to have access to great investment products at reasonable fees.”

Purpose, which includes one former Claymore staffer (Dan Rubin) has just launched its first closed-end fund, the area of the market in which Claymore also specialized. That fund, known as NexC Partners Corp, aims to provide long-term capital appreciation through investing in a high quality portfolio of North American dividend-paying equity securities and to make quarterly cash distributions (at the projected rate of 5% a year). Seif has agreed to invest at least US$1-million in the fund.

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But investors in that fund, be they participating in the public portion or in the private placement, will be getting something else: a stake in Purpose Investments. That stake could be as high as 30% (if the fund raises at least $700-million) and as low as 2.5% if less than $100-million is raised. If $100-million is raised, the stake will be 7.5% stake.

Giving investors a stake in the manager is innovative — though it has been used once before.

In late 2008, Cymbria Corp. (managed by EdgePoint Investment Group, a firm started by a group of former Trimark managers) was taken public and raised $234-million The amount raised was sufficient for the investors to gain a 23% stake in EdgePoint.

Since inception, its net asset value has increased by 45.8% on a cumulative basis. And Cymbria’s original investment in EdgePoint ($509,585) has now grown to almost $15-million. Cymbria has also received $4.1-million in dividends from EdgePoint — for a total contribution of $18.8-million. At last count, Cymbria’s stake in EdgePoint represented 3.52% of Cymbria’s total value.

As with the passive-like approach adopted at Claymore, NexC plans “a fundamental rules-based portfolio selection strategy.” The rules, that will mean an investment in about 40 stocks on an equally weighted basis, apply to companies that have had consistent and/or growing dividends over a five year period. The rules include those with a sustainable dividend pay-out ratios, healthy net income, fundamental momentum, and share buy-backs in place. Plans call for the portfolio to be rebalanced each quarter.

The indicative portfolio (which has an average yield of 4.8%) includes a number of Canadian issuers: three banks (National, Royal and TD); two other financials (CI, Power Financial) three telcos (Rogers, BCE, Bell Aliant and Telus); three REITs (Boardwalk, Calloway and Dundee) and two consumer discretionary (Thomson Reuters and Shoppers Drug Mart.) The fund has hired Breton Hill Capital, a firm that defines itself as an absolute return driven quantitative investment manager, as its investment advisor. To boost income and to mitigate risk, BNC, formed in 2010, will write covered call options on, at most 25% of the portfolio. It will also buy cash covered puts.